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Wednesday, August 25, 1999 Published at 16:21 GMT 17:21 UK

Business: The Economy

Russia seeks budget approval

Yeltsin's government wants the budget cleared by year end

As temperatures drop this winter in Russia, the political debate will be heating up, as the Russian parliament tries to reach agreement on next year's budget.

The central bank and the ministry of economics have now set the ball rolling, approving a draft budget.

Parliament will have its say from September onwards, when the bill has its first reading.

The third reading has to have taken place and the budget passed by 19 December, when parliamentary elections take place.

Passing a budget in Russia is never easy, as they are frequently caught in political crossfire. This year, it is set to be doubly difficult as it is an election year.

[ image: Prime Minister Putin now awaits IMF and Duma approval]
Prime Minister Putin now awaits IMF and Duma approval
The government is caught between the International Monetary Fund, who wants a tough budget before it lends Russia money, and parliamentarians, who want a budget which will help them get re-elected.

It is also the first budget of Prime Minister Vladimir Putin, who has only been in the job three weeks, may stand in presidential elections next year. President Boris Yeltsin has already announced that he would like Mr Putin to become his successor.

Key figures in the budget are an inflation forecast of 18% for next year and a prediction that the exchange rate will stand at 32 roubles to the dollar.

The draft budget expects revenues of 745.13bn roubles and spending of 803bn roubles, leaving a surplus of 1.13% of gross domestic product.

Excluding interest rate payments this would be a surplus of 3.1%. The IMF would like to see tougher spending cuts, to push the figure to 3.5%, reports say.

A step too far

"That is very ambitious," an analyst at ING Barings said.

And Eric Nielsen, senior economist at Goldman Sachs, believes that "the IMF (is) going too far". He added that the 1999 budget was one of the toughest Russia had seen and this year's was "even more vicious".

"We think it is broadly realistic," he said. "We are a little worried that the IMF wants an even tighter budget."

The IMF has lent Russia some $20bn since 1992 and is set to give the green light to a new tranche of a recently agreed $4.5bn 18-month loan - but only if the government in Moscow has its house in order.

With elections clearly in view, "the parliament is getting more and more politicised", the ING Barings analyst said, anticipating calls from both the Liberals and the Communists for generous social spending.

[ image: Rising food prices have hit Russians hard]
Rising food prices have hit Russians hard
Deputy Finance Minister Aleksey Kudrin said social ministries will get a bigger slice of the pie than previously, but whether this is enough in an election year has yet to be seen.

Pay will be index-linked by 20%, important in a country where inflation has wiped out savings in previous years. In September last year - following the rouble devaluation - inflation jumped to 38%.

"We cannot afford a repeat of the setbacks in previous years," Kudrin said.

Goldman Sachs' Eric Nielsen warns that the Duma is unlikely to have its resolve weakened by the forthcoming budget. "Budgetary policies are not big election issues in Russia.... It is more issues such as corruption, reform and privatisation," he said.

The 1999 budget will be hit when politicians seek to distribute cash to their regions in a last minute bid to buy votes, he said. This is also likely to happen in the run-up to the presidential elections next year.

"The biggest risk is the mid-year elections," he said.

Nielsen believes the Russian economy is robust enough to take the most austere of the budget's demands.

Russia's trade surplus jumped to $6.2bn in the first quarter of 1999, up from a meagre $0.2bn a year earlier. Now the predictions range from a growth rate of 3% to 8%.

Even at the lower level this would be more than at any time since economic reforms began in 1992, he said.

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